Following a 0.3% contraction in 2023, real GDP in Czechia is forecast to grow by 1.2% in 2024 and 2.8% in 2025 as declining inflation helps restore purchasing power. A broad-based moderation in goods and energy inflation and high base effects are expected to bring headline inflation down to 2.5% in 2024 and 2.2% in 2025. The phase-out of measures to mitigate the impact of high energy prices and the government’s public finance consolidation package are set to lead to a decline in the budget deficit to 2.4% in 2024 and to 1.9% in 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0.3 | 1.2 | 2.8 |
| Inflation (%, yoy) | 12.0 | 2.5 | 2.2 |
| Unemployment (%) | 2.6 | 2.8 | 2.9 |
| General government balance (% of GDP) | -3.7 | -2.4 | -1.9 |
| Gross public debt (% of GDP) | 44.0 | 45.2 | 45.5 |
| Current account balance (% of GDP) | 1.4 | 1.9 | 1.4 |
Signs of growth are emerging
Czechia’s real GDP declined by 0.3% in 2023, as high inflation eroded households’ purchasing power and led to a contraction in private consumption. Investments reported a strong growth, boosted by equipment investments, but overall domestic demand declined as inventories were wound down. Exports grew, driven by machinery and transport equipment, while imports declined due to reduced domestic demand (including for energy) and the inventories cycle. Resumption of positive quarterly growth as from the last quarter of 2023 and the improving consumer confidence indicator from 2024-Q1 are expected to drive activity in the course of the year, with GDP growth forecast to rebound to 1.2% in 2024 and 2.8% in 2025.
After two years of decline in household consumption, a turnaround is expected in 2024. As inflation dropped significantly, real wages and purchasing power are again growing. Supported also by high accumulated savings, household consumption is set to re-emerge as the main GDP driver in 2024 and 2025. On the back of a public finance consolidation package, government consumption growth is forecast to slow down. Similarly, public investments and equipment investments are expected to grow less strongly, as they were exceptionally high in 2023, the last year when a drawdown of EU funds from the 2014-20 programming period was possible. Still, the easing of financing conditions and an increase in EU funds inflow should support construction investments going forward. The central bank started the easing cycle in December 2023, with the key rate gradually cut from 7% to 5.75% in March 2024 and a further relaxation is expected.
Exports are forecast to increase further, as supply chain bottlenecks have eased and demand from main trading partners recovers albeit at a relatively modest pace. Additionally, as from 2025, as domestic demand increases and the inventories destocking cycle ends, imports are likely to grow faster than exports, creating a drag on economic growth. Risks to this forecast include a rebound in energy prices that can impact the energy intensive industry or a slower growth in demand from trading partners considering the high degree of openness of the Czech industry.
Labour market still under pressure
In 2023, the unemployment rate increased slightly to 2.6% due to weak economic activity. A further pick-up to 2.8% is expected in 2024. This is still one of the lowest levels in the EU and the labour market is set to remain tight in the years ahead, adding to pressures on wages. Shortages of skilled workers persist and population ageing adds additional pressure, limiting potential growth.
Inflation decline confirmed
Headline inflation slowed down from 12.0% on average in 2023 to 2.4% in 2024-Q1. Energy contributed positively to inflation in the first quarter as government measures to mitigate the effects of high energy prices expired and led to an increase in network fees, more than offsetting the decline in wholesale prices. Meanwhile, processed and unprocessed food prices had a negative contribution to inflation, as wholesale agricultural prices decreased, and food VAT was lowered. While the impact of the commodity price shock on inflation has gradually waned, wage growth is expected to become the main driver of inflationary pressures. Headline inflation is thus forecast to decline to 2.5% in 2024 and 2.2% in 2025 and HICP inflation excluding energy, food, alcohol and tobacco is projected to be above headline inflation at 4.1% in 2024 and 2.8% in 2025.
Deficit to drop but to remain persistent
Czechia’s general government deficit increased to 3.7% of GDP in 2023, on account of higher expenditure – on social transfers due to the automatic indexation of pensions to inflation, and on measures to mitigate the impact of high energy prices – outpacing the increase in revenue due to corporate income taxes windfall. The total net budgetary cost of energy-related measures is estimated at 1.1% of GDP in 2023. In addition, public investment growth peaked last year due to the completion of projects financed by EU structural funds.
The budget deficit is forecast to drop markedly, to 2.4% of GDP in 2024, on the back of the expiration of measures to mitigate the impact of high energy prices, and of the implementation of a government consolidation package that further decreases expenditure and increases revenue. Expenditure is set to drop as a percentage of GDP as energy-related measures, including the elimination of the cap on energy prices, are phased out and as government subsidies to renewable energy sources are reduced. The energy-related measures are projected to be phased out completely in 2024. Revenues are set to be supported by higher social security contributions on account of higher contribution rates, and taxes on production and imports. Based on unchanged policies, the deficit is expected to decrease to 1.9% in 2025, as revenue is set to grow faster than expenditure, GDP growth is forecast to accelerate supporting tax income, and social contributions rates continue to increase in 2025.
Public debt is still low compared to the EU average. The public debt-to-GDP ratio is forecast to rise from 44.0% in 2023 to 45.5% in 2025, driven by the negative headline balance, being partly offset by nominal GDP growth.